Ninth Circuit Affirms Mediated Facebook Settlement

The Ninth Circuit Court of Appeals has enforced a mediation confidentiality agreement and refused to nullify a mediated settlement agreement.

In Facebook v. ConnectU, Inc., No. 08-16873, (9^th Cir., April 11, 2011), Cameron and Tyler Winklevoss sued Mark Zuckerberg in Massachusetts claiming he stole the idea for the social networking site Facebook from them. Zuckerberg countersued the Winklevosses and their social networking site, ConnectU, in California. The United States District Court for the Northern District of California ordered the parties to mediation.

Prior to mediation, all parties signed a confidentiality agreement which stipulated “all statements made during mediation were privileged, non-discoverable and inadmissible,” in any other proceeding. During mediation negotiations, the Winklevosses agreed to give up all of ConnectU in exchange for cash and a percentage of ownership in Facebook.

The settlement fell apart during negotiations over the form of the final deal documents, and Facebook filed a motion with the district court seeking to enforce it. ConnectU argued that the Settlement Agreement was unenforceable because it lacked material terms and had been procured by fraud. The district court found the Settlement Agreement enforceable and ordered the Winklevosses to transfer all ConnectU shares to Facebook. This had the effect of moving ConnectU from the Winklevosses’ to Facebook’s side of the case.

The Winklevosses then appealed to the Ninth Circuit Court of Appeals.

The Court of Appeals rejected each of the Winklevosses’ claims. The court also stated,

The Confidentiality Agreement, which everyone signed before commencing the mediation, provides that:

“All statements made during the course of the mediation or in mediator follow-up thereafter at any time prior to complete settlement of this matter are privileged settlement discussions . . . and are nondiscoverable and inadmissible for any purpose including in any legal proceeding. . . . No aspect of the mediation shall be relied upon or introduced as evidence in any arbitral, judicial, or other proceeding.” (emphasis added).

This agreement precludes the Winklevosses from introducing in support of their securities claims any evidence of what Facebook said, or did not say, during the mediation. See Johnson v. Am. Online, Inc., 280 F. Supp. 2d 1018, 1027 (N.D. Cal. 2003) (enforcing a similar agreement). The Winklevosses can’t show that Facebook misled them about the value of its shares or that disclosure of the tax valuation would have significantly altered the mix of information available to them during settlement negotiations. Without such evidence, their securities claims must fail. See In re Daou Sys., Inc., 411 F.3d 1006, 1014 (9th Cir. 2005); see also McCormick v. Fund Am. Cos., 26 F.3d 869, 876 (9th Cir. 1994).

According to the Appellate Court,

The Winklevosses are not the first parties bested by a competitor who then seek to gain through litigation what they were unable to achieve in the marketplace. And the courts might have obliged, had the Winklevosses not settled their dispute and signed a release of all claims against Facebook. With the help of a team of lawyers and a financial advisor, they made a deal that appears quite favorable in light of recent market activity. See Geoffrey A. Fowler & Liz Rappaport, Facebook Deal Raises $1 Billion, Wall St. J., Jan. 22, 2011, at B4 (reporting that investors valued Facebook at $50 billion —3.33 times the value the Winklevosses claim they thought Facebook’s shares were worth at the mediation). For whatever reason, they now want to back out. Like the district court, we see no basis for allowing them to do so. At some point, litigation must come to an end. That point has now been reached.

The Ninth Circuit Court of Appeals affirmed the Northern District of California and refused to nullify the parties’ settlement agreement.

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